Financial Professionals

August 22nd, 2022

Has the Bear Market Officially Ended?

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Many headlines boasted last week that the Nasdaq Composite had officially entered a new bull market, which is technically true – over the course of the last several weeks, the tech-heavy Nasdaq bounced over +20% from its mid-June low, as investors poured back into some of the hardest hit shares in the first half of the year.

This sharp recovery has some pundits declaring the end of the bear market, which I think is a bit premature. Bear markets historically last about 10 months, and they are also notorious for staging rallies that investors often mistake for the start of a new bull. These are often referred to as “dead cat bounces,” and are fairly common in bear markets. In the 2000 – 2002 downturn, for example, there were four instances when the S&P 500 recovered by about 20%, only to continue making new lows until hitting a bottom in late 2002.1

Since the 2000-2002 bear market, roughly half of the S&P 500’s best days have taken place during a bear, and about one-third of the best days happened at the very beginning of a new bull market. And anytime the market is up or down more than 3%, it is almost always during a bear market. Big moves happen in choppy markets, and they usually occur at a time when no one truly knows whether we are actually in a bull or a bear market, which can only be determined with the benefit of hindsight. Again, I think it is too early to declare the bear market officially over.

One of the key drivers behind this recent rally appears to be the July inflation print, which showed the consumer-price index rising 8.5% year-over-year, down from 9.1% in June. The month-over-month inflation reading for July was also flat, which signaled to some market participants that inflation may have peaked.

The thinking goes that falling inflation means less pressure on the Federal Reserve to raise rates as aggressively as they have been, which would be a tailwind for markets. This outlook can be confirmed in the futures markets, which continue to show traders wagering the fed funds rate will peak by next spring, and also that the Federal Reserve will start cutting rates sometime later next year. These markets are pegging the Fed’s target rate at 3.2% by the end of 2023, which is lower than what Fed officials projected in their June minutes.

But these forecasts in the futures markets have been wrong before, and recently. This time last year, the prevailing bets in derivatives markets pegged inflation at 3.3% from summer 2021 to summer 2022, which turned out to be way off the mark. Prices rose nearly three times as fast as the forecast called for.

In my view, it is hazardous to try and guess the Fed’s course of policymaking over the next 12 months, which it appears that some of the current bulls are doing. While I agree inflation pressures are likely to abate in the coming months and quarters, there is no telling if some extraneous factor – like the war in early 2022 – may come along and disrupt supply chains and commodity markets again. That’s impossible to know, but it could be influential in the Fed’s decision-making.

Bottom Line for Investors

Most readers and investors have seen the statistics about long-term returns in the stock market, which have been about +10% annualized over the past century. That is a highly desirable return for most people, and the upshot of investing in the stock market is that bear markets are baked into these annualized returns. Stocks lose an average of 36% in bear markets, but they gain an average of 114% in bull markets. Bull markets also last much longer, on average.

I realize it can be fairly unsatisfying to say the bear market may or may not be officially over, and that investors need to take the bad with the good. But I think we’re in a period now where the key goal should not necessarily be to predict correctly when the bear will end and the bull will begin. The goal here to ensure participation in the market’s biggest up days, which history tells us happens either during a bear market or very early in the new bull market—one of which describes where we are today.

Disclosure

1 Wall Street Journal. August 14, 2022. https://www.wsj.com/articles/market-rebound-draws-wary-eye-from-some-investors-11660469378?mod=djem10point


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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